Question 1

Which of the following statements is correct?
A) In a reverse split,a company reduces the number of shares outstanding in order to stabilize and provide a floor for a rapidly declining stock price.
B) In theory,dividends are determined as a residual item.Therefore,in order to conserve earnings for better future earnings opportunities,the poorer the firm's investment opportunities,the lower its dividend payments should be.
C) The farther to the right the IOS is the higher a firm's dividend payout ratio,other things held constant.
D) Even if a stock split has no information content,and even if the dividend per share adjusted for the split does not increase,there can still be a real benefit (i.e. ,a higher value for shareholders)from such a split,but any such benefit is probably small.

Accepted Answer

D

Question 2

Which of the following would be classified as a use of cash?
A) An increase in accounts payable.
B) A decrease in marketable securities.
C) A decrease in accounts receivable.
D) An increase in retained earnings.
E) An increase in inventories.

Accepted Answer

An increase in inventories represents a use of cash because the company is spending cash to purchase more inventory.

Question 3

Which of the following statements is correct?
A) In the text,depreciation is regarded as a use of cash because it reduces fixed assets,which then must be replaced.
B) If a company uses some of its cash to pay off short-term debt,then its current ratio will always decline,given the way the ratio is calculated,other things held constant.
C) During a recession,it is reasonable to think that most companies' inventory turnover ratios will change while their fixed asset turnover ratios will remain fairly constant.
D) During a recession,we can be confident that most companies' DSOs (or ACPs)will decline because their sales will probably decline.
E) Each of the above statements is false.

Accepted Answer

None of the statements are correct.

Explanation for each statement:

A) Depreciation is not a use of cash, but a non-cash expense. While it does reduce the value of fixed assets, it does not necessarily mean that they need to be replaced.

B) If a company uses cash to pay off short-term debt, its current ratio may actually improve as current liabilities decrease.

C) During a recession, both inventory turnover ratios and fixed asset turnover ratios are likely to decline as sales and production decrease.

D) During a recession, DSOs (or ACPs) are likely to increase, as customers may take longer to pay their bills.

Question 4

Which of the following statements is most correct? If a company lowers its DSO,but no changes occur in sales or operating costs,then
A) the company might well end up with a higher debt ratio.
B) the company might well end up with a lower debt ratio.
C) the company would probably end up with a higher ROE.
D) the company's total asset turnover ratio would probably decline.
E) none of the above is a correct statement.

Accepted Answer

Lowering DSO means the company is collecting its accounts receivables faster, which increases its cash flow. This, in turn, can allow the company to pay off debt, resulting in a lower debt ratio. However, there is no direct impact on ROE, and the total asset turnover ratio is not related to DSO. Therefore, option B is the most correct statement.

Question 5

Other things held constant,if a firm holds cash balances in excess of their optimal level in a non-interest bearing account,this will tend to lower the firm's
A) Operating profit margin.
B) Total asset turnover.
C) Return on equity.
D) All of the above.
E) Answers b and c above.

Accepted Answer

Holding excess cash balances in a non-interest bearing account means that the firm is not earning any return on those funds. As a result, the firm's total asset turnover (B) and return on equity (C) will both decrease, which will ultimately lower the firm's profitability and operating profit margin (D). Therefore, the correct answer is E - holding excess cash balances in a non-interest bearing account will lower the firm's total asset turnover and return on equity.

Question 6

Other things held constant,which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities. )
A) Fixed assets are sold for cash.
B) Cash is used to purchase inventories.
C) Cash is used to pay off accounts payable.
D) Accounts receivable are collected.
E) Long-term debt is issued to pay off a short-term bank loan.

Accepted Answer

The quick ratio is calculated by dividing quick assets (cash, marketable securities, and accounts receivable) by current liabilities. None of the other choices directly affect the quick assets or current liabilities, but choice D would increase the quick assets without affecting current liabilities, thereby increasing the quick ratio.

Question 7

Changes in balance sheet accounts are necessary for
A) A typical ratio analysis.
B) Pro forma balance sheet construction.
C) Statement of cash flows construction.
D) Profit and loss analysis.
E) Pro forma income statement construction.

Accepted Answer

The answer of Changes in balance sheet accounts are necessary...

Question 8

Recently the M&M Company has been having problems.As a result,its financial situation has deteriorated.M&M approached the First National Bank for a badly needed loan,but the loan officer insisted that the current ratio (now 0.5)be improved to at least 0.8 before the bank would even consider granting the credit.Which of the following actions would do the most to improve the ratio in the short run?
A) Using some cash to pay off some current liabilities.
B) Collecting some of the current accounts receivable.
C) Paying off some long-term debt.
D) Selling some of the existing inventory at cost.
E) Purchasing additional inventory on credit (accounts payable).

Accepted Answer

The answer of Recently the M&M Company has been having...

Question 9

Which of the following statements is most correct?
A) Cash flows and accounting profit are not at all related since no common elements are used in the calculation of either individual measure.
B) The debt ratio measures that portion of fixed assets which is supported by common equity.
C) High inflation can seriously distort firms' balance sheets,and since inflation also affects depreciation and inventory costs,profits can also be affected.
D) Financial statement analysis is important from the investor's viewpoint in assessing past performance and predicting future performance.However,from a management perspective,financial statement analysis measures history and is merely a reporting requirement.It is not useful for planning future actions because it does not help determine future cash flows.
E) When an action is taken at one point in time,but its full effects cannot be accurately measured until later,this has the potential to affect the firm's financial statements.However,as long as the firm keeps the same standard accounting period this timing problem can be avoided.

Accepted Answer

High inflation can distort a firm's balance sheet by causing the historic cost of assets to differ significantly from their current market value. This can lead to inaccuracies in financial ratios and metrics. Additionally, inflation can affect the cost of inventory and depreciation, which can also impact a firm's financial performance. Therefore, Statement C is the most correct. Statements A, B, D, and E are incorrect or incomplete.

Question 10

Which of the following statements is correct?
A) If two firms pay the same interest rate on their debt and have the same rate of return on assets,and if that ROA is positive,the firm with the higher debt ratio will also have a higher rate of return on common equity.
B) One of the problems of ratio analysis is that the relationships are subject to manipulation.For example,we know that if we use some of our cash to pay off some of our current liabilities,the current ratio will always increase,especially if the current ratio is weak initially.
C) Generally,firms with high profit margins have high asset turnover ratios,and firms with low profit margins have low turnover ratios;this result is exactly as predicted by the Du Pont equation.
D) Firms A and B have identical earnings and identical dividend payout ratios.If Firm A's growth rate is higher than that of Firm B,Firm A's P/E ratio must be greater than Firm B's P/E ratio.
E) None of the above statements is correct.

Accepted Answer

The answer of Which of the following statements is correct?
A)...

Question 11

Which of the following statements is correct?
A) The annual report contains four basic financial statements: the income statement;balance sheet;statement of cash flows;and statement of changes in long-term financing.
B) Although the annual report is geared toward the average stockholder,it represents financial analysts' most complete source of financial information about the firm.
C) The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends and the riskiness of those cash flows.
D) The annual report provides no relevant information for use by financial analysts or by the investing public.
E) None of the above statements is correct.

Accepted Answer

The statement that accurately describes the key importance of annual report information is C. The annual report provides vital information for investors to form their expectations about the firm's future earnings, dividends, and the risk associated with those cash flows. Option A is incorrect as the report comprises more than just four financial statements. Option B is partially correct but doesn't accurately reference the primary role of the report. Option D is incorrect as the annual report is a significant source of information for investors and financial analysts.

Question 12

Stock dividends
A) Have the same effects on financial statements as cash dividends.
B) Are similar to stock splits in that they do not change the fundamental position of current shareholders.
C) Must be accompanied by cash dividends.
D) Are viewed unfavorably by investors and thus should not be used.
E) Have no effect on a firm's balance sheet.

Accepted Answer

Stock dividends are similar to stock splits as they do not change the fundamental position of current shareholders. They increase the number of shares outstanding but do not affect the company's overall equity or assets. Therefore, they do not have the same effects on financial statements as cash dividends. They do not need to be accompanied by cash dividends and are not necessarily viewed unfavorably by investors. They do have an effect on a firm's balance sheet, by reducing retained earnings and increasing the stockholders' equity section for common stock.

Question 13

A stock split will cause a change in the total dollar amounts shown in which of the following balance sheet accounts?
A) Cash.
B) Common stock.
C) Paid-in capital.
D) Retained earnings.
E) None of the above.

Accepted Answer

A stock split does not change the total dollar amounts shown in the balance sheet accounts. It increases the number of shares outstanding while decreasing the par value per share, but the overall equity value remains the same.

Question 14

A stock dividend will,in and of itself,affect the amounts in which of the following accounts? (Assume the stock has a par value. )
A) Common stock account.
B) Paid-in capital account.
C) Retained earnings account.
D) Cash.
E) Only answers a,b,and c above.

Accepted Answer

A stock dividend affects the common stock account, as it increases the number of shares outstanding. It also affects the paid-in capital account as the par value of the newly issued shares is transferred to this account. Finally, it affects the retained earnings account as the distribution reduces the balance in this account. Cash is not impacted by a stock dividend as it involves the issuance of additional shares, not the payment of cash.

Question 15

Other things held constant,which of the following will not affect the current ratio,assuming an initial current ratio greater than 1.0?
A) Fixed assets are sold for cash.
B) Long-term debt is issued to pay off current liabilities.
C) Accounts receivable are collected.
D) Cash is used to pay off accounts payable.
E) A bank loan is obtained,and the proceeds are credited to the firm's checking account.

Accepted Answer

The answer of Other things held constant,which of the following...

Question 16

A firm's current ratio has steadily increased over the past 5 years,from 1.9 five years ago to 3.8 today.What would a financial analyst be most justified in concluding?
A) The firm's fixed assets turnover probably has improved.
B) The firm's liquidity position probably has improved.
C) The firm's stock price probably has increased.
D) Each of the above is likely to have occurred.
E) The analyst would be unable to draw any conclusions from this information.

Accepted Answer

The current ratio measures a firm's liquidity position, and an increase in the current ratio indicates an improvement in liquidity. Therefore, financial analysts would be justified in concluding that the firm's liquidity position has probably improved. Choices A and C have no direct relationship with changes in the current ratio, and choice D is overly broad and speculative.

Question 17

All of the following represent cash outflows to the firm except
A) Taxes.
B) Interest payments.
C) Dividends.
D) Purchase of plant and equipment.
E) Depreciation.

Accepted Answer

Depreciation is a non-cash expense that represents the wear and tear of an asset over time. While it may be recorded as an expense on the income statement, no actual cash outflow is associated with it. Taxes, interest payments, dividends, and purchase of plant and equipment all represent cash outflows to the firm.

Question 18

We can be sure that,in and of itself,a stock dividend will not affect which of the following financial aspects of the firm? (Assume the stock has a par value. )
A) Market value per share.
B) Book value per share.
C) Common stock account.
D) Paid-in capital account.
E) Total assets.

Accepted Answer

A stock dividend does not affect the total assets of the firm. It only changes the composition of the equity accounts by transferring an amount from retained earnings to the common stock and additional paid-in capital accounts, without any change in the par value of the stock. Therefore, choices A, B, C, and D are incorrect because a stock dividend may have an impact on these financial aspects of the firm.

Question 19

Which of the following actions will cause an increase in the quick ratio in the short run?
A) $1,000 worth of inventory is sold,and an account receivable is created.The receivable exceeds the inventory by the amount of profit on the sale,which is added to retained earnings.
B) A small subsidiary which was acquired for $100,000 two years ago and which was generating profits at the rate of 10 percent is sold for $100,000 cash.(Average company profits are 15 percent of assets. )
C) Marketable securities are sold at cost.
D) All of the above.
E) Answers a and b above.

Accepted Answer

Choice A will decrease the quick ratio as it reduces the amount of cash and increases the current assets (accounts receivable) which may not be readily convertible to cash. Choice B will increase the quick ratio as it involves a cash inflow which directly affects the numerator of the quick ratio. Choice C will have no effect on the quick ratio as marketable securities are already included in the calculation of quick ratio. Therefore, choices A and C can be eliminated. Hence, the correct answer is E.

Question 20

Which of the following statements is most correct?
A) An increase in a firm's debt ratio,with no changes in its sales and operating costs,could be expected to lower its profit margin on sales.
B) An increase in the DSO,other things held constant,would generally lead to an increase in the total asset turnover ratio.
C) An increase in the DSO,other things held constant,would generally lead to an increase in the ROE.
D) In a competitive economy,where all firms earn similar returns on equity,one would expect to find lower profit margins for airlines,which require a lot of fixed assets relative to sales,than for fresh fish markets.
E) It is more important to adjust the Debt/Assets ratio than the inventory turnover ratio to account for seasonal fluctuations.

Accepted Answer

An increase in a firm's debt ratio, with no changes in its sales and operating costs, would increase the interest expense and lower the net income available for shareholders. This would lead to a lower profit margin on sales.

Quiz 7: Analysis of Financial Statements

Which of the following statements is correct?

Which of the following would be classified as a use of cash?

Which of the following statements is correct?

Which of the following statements is most correct? If a company lowers its DSO,but no changes occur in sales or operating costs,then

Other things held constant,if a firm holds cash balances in excess of their optimal level in a non-interest bearing account,this will tend to lower the firm's

Other things held constant,which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities. )

Changes in balance sheet accounts are necessary for

Which of the following statements is most correct?

Which of the following statements is correct?

Which of the following statements is correct?

Stock dividends

A stock split will cause a change in the total dollar amounts shown in which of the following balance sheet accounts?

A stock dividend will,in and of itself,affect the amounts in which of the following accounts? (Assume the stock has a par value. )

Other things held constant,which of the following will not affect the current ratio,assuming an initial current ratio greater than 1.0?

A firm's current ratio has steadily increased over the past 5 years,from 1.9 five years ago to 3.8 today.What would a financial analyst be most justified in concluding?

All of the following represent cash outflows to the firm except

We can be sure that,in and of itself,a stock dividend will not affect which of the following financial aspects of the firm? (Assume the stock has a par value. )

Which of the following actions will cause an increase in the quick ratio in the short run?

Which of the following statements is most correct?